Legal Advice

Why do I Have to Sign a Receipt for an FDD?

by Jonathan Barber

If a franchisor sends you, a potential buyer, a 200-to-300 page document and asks you to sign a “receipt page,” don’t panic. You’re only helping the franchisor to remain compliant with state and federal franchise laws. The receipt pages are not part of a contract, and you are not binding yourself to anything by signing them. They exist purely to show the date you were given or “disclosed” with the franchise disclosure document, commonly referred to as the “FDD.”

THE DISCLOSURE RULES

Why is that date so important? The Federal Trade Commission (FTC) requires franchisors to send each prospective franchisee a copy of its FDD, and the prospective franchisee cannot sign a franchise agreement or make payments to the franchisor until fourteen days after receiving the agreement. If a franchisee signs a franchise agreement or pays the franchisor prior to the 14 days he was disclosed with the FDD, the franchisor is in a world of trouble. Federal and state laws label this as an “unfair and deceptive trade practice,” which carries significant damages. Down the road, the franchisee could have serious claims against the franchisor, based solely on the timing of the disclosure.

There are certain exemptions to the 14-day disclosure rule. Primarily, the FTC exempts the transfer of a franchise by an existing franchisee, as long as the franchisor has not had “significant involvement” with the prospective franchisee. Therefore, technically, a franchisor doesn’t have to disclose you if you’re buying an existing location. However, if you will be required to sign the franchisor’s then-current form of franchise agreement as a condition of the resale, then you must be disclosed even though you’re buying an existing location. Similarly, if the franchisor directs you toward buying an existing location, he must disclose you with the FDD. At the end of the day, while there are certain exemptions, it’s best practice for franchisors to simply disclose every prospective franchisee whether that candidate is exploring a resale or a new franchise location. We represent about 65 franchisors, and we recommend this to all of them.

WHAT TO DO IF YOU’RE NOT DISCLOSED

If you’re in the process of buying into a franchise, and the franchisor has not provided the

FDD, you should reach out immediately and ask for a copy. Most franchisors are fairly sophisticated and understand the basics of franchising enough to follow the disclosure rules. If you have already bought into a franchise and were never disclosed with the FDD, you should talk to an attorney to determine your options. If you have a great relationship with your franchisor, bring it up with them. However, if you weren’t disclosed, you are probably facing other issues with your franchised business. Franchisors are required to follow the federal and state franchise laws, which exist to protect the consumer—you!

Jonathan Barber exclusively practices franchise law as a partner at Barber Power Law Group, in Charlotte, North Carolina. He has assisted hundreds of clients world-wide with their FDDs and franchise purchases. Barber also represents emerging and established franchisors. Contact Barber at 980-202-5679 or JBarber@barberpowerlaw.com.